A truly free market is a market free of all human coercion, active and passive. Active coercion refers to "gun to the head" coercion: the threat to actually cause suffering or physical harm to another. Passive coercion refers to the "let them starve" coercion, the threat to allow suffering physical harm to come to another.

Passive coercion is still coercion. Every ordinary human being will naturally act to avoid or ameliorate her own suffering or physical harm. To make passive coercion effective, the natural tendency to for a person to ameliorate her own suffering must be actively thwarted by the threat of active coercion. For the passive threat "work [for me] or starve" to be effective, I must also employ active coercion: "try to feed yourself, and I will shoot you."

While it is in some sense physically possible to have a truly free market in reality, such an arrangement is at best only meta-stable and requires continuous teleological adjustment. In 21st century terrestrial society, we must view a truly free market as a purely theoretical construct. Still, even as a theoretical construct, the notion has some value, precisely because of the independent value ordinary people place on freedom in general.

A truly free market is efficient, but efficiency is an equivocal term. Efficiency is some output value divided by some input value, but we must specify less ambiguously what output and input values apply to construct a coherent notion of the efficiency of any process. A bus, for example, is less efficient than an automobile in terms of vehicle miles per gallon of fuel, but it is more efficient in terms of passenger miles per gallon. On the other hand, a bus is less efficient in terms of passenger time per miles traveled.

Efficiency can also have a positive or negative sense, i.e. the "best" system might either be the maximal or minimal value of some ratio. For example, we can talk about about the efficiency of an engine in terms of heat produced divided by fuel consumed: An engine is more efficient to the extent that it minimizes this ratio. Any positive or negative construction of efficiency can, in theory, be transformed into an equation of the opposite sense; in practice, however, it is often the case that one sense is much easier to measure than another. A more heat-efficient engine (negative efficiency) will translate into a more mileage-efficient engine (positive efficiency), but an engineer can easily directly measure the heat-efficiency of an engine without having it travel any miles at all.

It is often supposed that a truly free market is efficient in terms of value produced per cost of production. But this sense of efficiency is not supported, precisely because it is too difficult to measure the actual value (the use value in Marxist terms) of what is produced.

A free market is efficient at setting the exchange value (price) of a commodity to its opportunity-adjusted cost. A free market does not reward the production of commodities of higher use value, regardless of how well we are able to define use value. A free market rewards the identification and exploitation of bottlenecks, i.e. imbalances in supply and demand. But the very nature of the truly free market embodies a negative feedback process: the narrower the bottleneck (the greater the discrepancy between supply and demand), the more that bottleneck attracts additional labor, thus raising the opportunity-adjusted cost of the commodity, until the price and the cost are again in equilibrium.

In a truly free market, then, any excess value (the difference between the use value and the exchange value) accrues to the consumer of a commodity; the consumer is responsible only for replacing the opportunity-adjusted cost of the commodity.

We can correlate this outcome precisely to the canonical (if poorly stated) slogan of communism.

From each according to his ability. Each person is responsible for replacing by productive activities the opportunity-adjusted cost of the commodities she consumes. To each according to his need. Each person receives the full (subjectively-defined) excess value of the commodities she consumes.

5 comments:

Under capitalism, the consumer also receives surplus benefit (called consumer surplus), just not all of it, the producer receives benefit as well. I'm not sure how your system would work. Let's say I eat a McDonalds double cheeseburger which costs McDonalds %.60 to make. I couldn't possibly replace that cheeseburger for $0.60! In fact, the reason I purchased the double cheeseburger for $1, giving McDonalds $0.40 profit, is because it would cost me several dollars, let's say $3, to produce that same product myself.

So in fact, McDonalds has saved me $2 by offering their double cheeseburger for $1. I receive $2 of benefit and McDonalds receives $0.40, we both benefit which is the beauty of capitalism. If McDonalds raised their price to $3.01, then I would refuse to buy and make my own double cheeseburger.

Now under your system, I could replace the double cheeseburger with $0.60 of my labor or perhaps another product. But then how do we establish prices and wages? How do I know what a double cheeseburger is worth and what my labor is worth? What if I'm a talented doctor? A gifted musician? Would my labor be of the same value as an incompetent doctor? A talentless musician?

One of the huge problems with Marxism is that the system does not allow for returns to capital. Shouldn't a factory owner receive something for providing the factory and equipment? Let's say he built it by hand, he only receives the labor value of the factory? What about the risk he takes? If the factory produces stuff no one wants, he has lost all of his work.

It would take a book (and there are several out there already--Mises, Hayek) to point out the flaws of communism. It's a system that sounds good, but can't be put into practice. Maybe heaven will have a functioning communist economy, but then communists don't believe in heaven, do they?

First of all, you have missed the point of the main article: Capitalism and free markets are distinct concepts. Your McDonald's example is valid only under (more or less) free markets, where competition between McDonald's and Burger King reduces the surplus labaor embedded in a hamburger to a minimal value.

Under capitalism (where owners of capital have a privileged position), however, there's no guarantee that the balance between McDonald's & Burger King would remain stable. Both companies' best strategy is to try to put the other out of business, so that they would have a monopoly on hamburgers. At that point, they would increase the price to the replacement price (less a few cents), maximizing the surplus labor value and minimizing the surplus consumer value.

Alternatively, an investor's best strategy is to move his capital to a field where dominance or outright monopoly permits maximizing surplus labor value and minimizing surplus consumer value.

An even better strategy is to use one's economic advantage to directly control the political establishment, granting a monopoly directly by police power, which is precisely the strategy pursued during the Bush administration. Judging from Obama's behavior, he shows no sign of rolling back this direct economic control of the government.

I found this a very interesting read. Close to my current opinion. In a truly free market there is almost no margin, since if there is a margin, indeed others will start producing for a slightly lower margin. At the end the margin is only there to recover the capital investment, not for profit. All need to work for their pay, capital does not generate returns. I generally also add to the hypothesis of "Free Market" the one of "Ideal Market", where the rational purchaser is fully informed. You would not buy a product that you know is equivalent for a higher price only because the company wants more profit, so your purchasing behavior will be very communistic, you will purchase the product that has almost no cost except for raw material and labour. Companies would not be able to manipulate the market for profit, since the perfect information allows all producers to provide a better product if you are not honest.

Corporatism as we know it, is thus based on secrecy, not rational purchasers and market manipulation, since this gives profit on capital. Capitalism implemented with a true ideal market, will lead to perfect competition and very limited profit. The time you can profit from innovation would be limited in this system due to intense competition. This leads to the issue of motivation, that most see in communism. Why would you invest in innovation in an ideal market, since anyone can copy your innovation (perfect information) and you would not profit from working out your ideas. On the other hand if you protect the innovation (copy rights, import rights, etc...) you make the market less free, you restrict people to produce something with current methods and you end up in the current politics of nationalism and corporatism. Sadly the market is not ideal, not even free (capitalistic) and the price of products is not what they should be.

P.S.: I was logged into Google, but commenting as Google made me enter the password again in Blogspot, I do not like this kind of indentification.

At the end the margin is only there to recover the capital investment, not for profit.

It's even worse than that: capital investment is a sunk cost, and trying to recover a sunk cost is a classic fallacy in economics. See Michael Perelman's book Railroading Economics for a very thorough treatment of the sunk cost fallacy in capitalist economics.

Capitalism implemented with a true ideal market, will lead to perfect competition and very limited profit.

In an ideal market, capitalism leads to zero profit, without even the ability to recover capital costs.

Why would you invest in innovation in an ideal market, since anyone can copy your innovation (perfect information) and you would not profit from working out your ideas.

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